Q2 2023 Church & Dwight Co Inc Earnings Call
Good morning, ladies and gentlemen, and welcome to the Church <unk> Dwight second quarter 2023 earnings Conference call before we begin I've been asked to remind you that on this call. The company's management may make forward looking statements regarding among other things the company's financial objectives and forecasts.
These statements are subject to risks and uncertainties and other factors that are described in detail in the Companys SEC filings.
I would now like to introduce your host for today's call Mr. Matt Farrell, President and Chief Executive Officer of Church <unk> Dwight. Please go ahead Sir.
Thank you operator, hey, good morning, everyone. Thanks for joining us today I'll begin with a review of Q2 results and then I'll turn the call over to Rick Dierker, our CFO and when Rick is wrapped up we'll open the call up for questions.
Q2 was an excellent quarter for church <unk> Dwight reported revenue was up nine 7% exceeding our 7% outlook.
And this is thanks to strong results from several brands, including our two most recent acquisitions hero and thorough breath.
Organic sales grew 5.4% exceeded our 3% Q2 outlook.
Gross margin expanded 270 basis points.
In marketing as a percentage of sales increased 130 basis points to items that are worthy of note.
The first one is 18% of our global sales were purchased online.
Compared to 17, 5% in the year ago quarter, and second private label is stable and our categories. Both in the U S and internationally.
Adjusted EPS was <unk> 92, and this was <unk> 14th cents higher than our 78 cent EPS outlook and that result was driven by higher sales higher than expected gross margin and a lower tax rate now I'm going to comment on each business first step is the U S. The U S consumer business had six 3% organic sales growth.
And six of our 14 power brands held or gained market share in the quarter and for context. The brands grew share represent 65% of our U S sales.
Now I want to look at a few of the more important categories in the U S. Starting with laundry. So laundry is a real success story in Q2.
Church, <unk> Dwight close out the quarter as the fastest growing overall laundry detergent liquid detergent unit dose detergents and sent booster manufacturer in both dollar and unit share arm <unk> Hammer liquid laundry continues to see strong consumption growth driven in part by the continued trade.
Down to value brands and in part by media support behind our new give it the hammer Master brand advertising campaign.
Arm <unk> hammer liquid laundry detergent grew share by 90 basis points in the quarter. So we're now at 14, 5% sure and extra which is an extreme value segment of the category grew consumption seven 2% and gained 20 basis points of share in Q2.
Arm <unk> Hammer litter also continues to perform extremely well with 12, 6% growth outpacing the category and growing share.
Consumers continue to choose arm <unk> hammer litter offerings, and our Orange box in particular offers great value for the cost constraints cat owner.
Turning now to personal care.
<unk> grew consumption, 12% in the quarter as we continue to build dry shampoo awareness and drive household penetration.
Trojan delivered share growth and increased share to 68, 3% in Q2.
Hero, which was acquired last October grew year over year consumption by 66%, gaining four seven share points to achieve a 17, 2% market share in the total acne treatment category.
The number of retail distribution points has tripled since we acquired the brand and we still have room to run as we expand across all classes of trade. The hero team is doing a spectacular job growing this business and there continues to be a great deal of excitement at church and Dwight about the hero brand. Similarly Thoroughbred.
Which was acquired in 2021 is.
He is performing extremely well with 100% year over year consumption growth in the quarter.
<unk> grew share five six points year over year towards two a 13% share of the mouthwash category. The mouthwash category grew 14% in the quarter and thorough breath accounted for 60% of the category growth.
Distribution of their breath has more than doubled since the acquisition date.
So Cerro breath is now the number two non alcohol mouthwash brand and the clear number three in total mouthwash and we expect this brand to be a long term grower for church and Dwight rigor.
Regarding a couple of businesses that depressed our 'twenty two results Waterpick is stabilizing with Q2 coming in close to plan and this is similar to Q1.
While the <unk> fusion was close to our plan in the first half our consumption was down in Q2, 9%, partly due to distribution losses at some retailers do our supply issues in 2022.
The good news is the gummy category was up 1% in Q2 after three successive down quarters and our job now is to win back retailer confidence every game lapsed consumers. So we expect both businesses. This is waterpick invite infusion year over year to be flat net sales so not hurting us in 'twenty three versus 20.
Two.
Next up is international our international team is doing a great job.
Delivering organic sales growth of six 1% in Q2, driven by broad based growth in every one of our six subsidiaries and all five regions Global markets group and finally specialty products specialty products organic sales decreased six 5%, but this is primarily due to lower volume in the dairy.
Business as lower priced imports return to the U S market.
I'm going to wrap up my comments right now by saying consumption on our consumer products businesses are strong.
Returned to volume growth as expected in the second half in fact July is off to a very strong start.
Our value offerings are performing well as our premium offerings acquisitions are on track and because we had an excellent first half and we have a strong outlook for the second half we are in a position to significantly increase our marketing spend last year, we pulled back on marketing due to our fill rate issues.
When we started 2023, we intended to increase our marketing from 10% of sales in 2022 to 10, 5% of sales in 2023, and then 11% in 2024. So we now intend to ramp up marketing to 11, 11% of sales. This year in 2023 in support of our brands and new products.
Watches as business gets back to normal and now I'm going to turn it over to Rick to give you some color around Q2, and the full year and other investments that we'll be making in the second half.
Thank you, Matt and good morning, everybody, we'll start with EPS second quarter adjusted EPS was up 92 cents up 21% to the prior year.
Matt mentioned, the 92 cents was better than our 78 cent outlook, primarily due to continued strong consumer demand for many of our products and higher than expected gross margins as well as a lower tax rate.
Net sales was up nine 7% and organic sales.
We're up five 4% almost half of the reported revenue growth year over year was hero organic sales were once again driven by pricing in Q2 with volumes slightly down that slight decline was better than expected and turning to the second half. We continue to expect a return to volume growth.
Our second quarter gross margin was 43, 9%, a 270 basis point increase from year ago, primarily due to productivity pricing and strong contributions from higher margin acquisitions that are offsetting inflation.
This result exceeded our expectations for the quarter as we saw a greater impact from productivity programs, a better product mix driven by our recent acquisitions let.
Let me walk you through the Q2 bridge gross margin was made up of the following positive 280 basis points impact from price volume mix.
Positive 120 basis points from acquisitions, and a positive 160 basis point impact from productivity and 10 basis points from currency, partially offset by a drag of 300 basis points due to higher manufacturing costs for the balance of the year. We expect this trend to continue.
Moving to marketing marketing was $29 million up year over year marketing expense as a percentage of net sales was nine 1% or 130 basis points higher than Q2 of last year.
For SG&A Q2, adjusted SG&A increased 60 basis points year over year.
Other expense all in was 24 million and $9 1 million increase due to higher average interest rates for the full year. We now expect other expense of approximately $100 million. We do not have any looming long term debt refinancings in fact other than the $200 million left on our term loan.
So 2027 is the timing of our next maturity.
For income tax our effective rate for the quarter was 17, 9% compared to 24, 1% in 2022, a decrease of 620 basis points driven by a higher tax benefit from stock option exercises. We now expect our full year rate to be approximately 22%.
And now to cash for the first six months of 2023 cash from operating activities increased to $509 million due to higher cash earnings and improvements in working capital.
Turning to the full year outlook, given the strength of our Q2 results and our confidence for the remainder of the year, we're raising our outlook for sales gross margin EPS and cash flow.
We now expect a full year of 2023 reported sales growth to be approximately 8% and organic sales growth to be approximately 5%.
Given the strength of the business, we see opportunities to make incremental investments in our brands and capabilities in future quarters. We now expect full year reported gross margin to expand 200 basis points compared to our previous outlook, we see commodity cost favorability higher productivity and faster growth from our higher margin recent acquisitions, while we have seen.
Some pockets of lower inflationary pressure since our prior outlook, we continue to expect net inflation for the year for.
For perspective, we expect $120 million of manufacturing cost increases in 2023.
Much better than the $290 million, we saw in 2021, and the $250 million 2022, but still elevated from historical levels speak.
Speaking of history, if we look back at history from 2010 to 2019, we typically had 2% of Cogs as inflation during the Covid impacted years of 2020 to 2022, we saw an 8% of Cogs impact and in 2023, we're seeing about a 4% inflation rate.
So currently we see commodities like ethylene down 20% year over year, however, going the other way, we see soda ash up 50% soda Ash is now used with lithium for lithium carbonate, which is then used in lithium batteries and solar panels. This demand spike combined with pressure on the supply side. So for example, China is the largest.
Player of soda ash globally, and has had intermittent supply issues and that's causing upwards.
Pressure on price.
So the point is we're not in a deflationary period as of yet.
<unk> gross margins, we have made a lot of progress however for the full year, we still expect to be about 200 basis points below our pre COVID-19 margin levels. So a lot of opportunity over the next few years.
We intend to increase marketing as a percent of net sales to 11%. This is great news as we previously anticipated getting back up to 11% in 2024, and the fact that we're able to get there sooner than initially anticipated will position the business well for the future.
We expect SG&A, both in dollars and as a percent of sales to increase compared to 2022. The increase in SG&A is expected to be larger than what was assumed in our prior outlook as a strong business performance increases in incentive compensation and as we make strategic investments as in past years. When we have strong business performance, we're investing for the future. These investments are focused on.
Two areas first growth with higher marketing investments in R&D investments around NPD as well as accelerating product registrations in international markets.
It would be efficiency investments in automation and technology.
We now expect full year EPS to be approximately 6% and as a reminder, our EPS guidance includes the step up of marketing that we've talking about and higher SG&A.
We now expect full year cash flow from operations to be approximately 1 billion previously we expected to be 950 million to $50 million increase is driven by higher cash earnings and an improvement in working capital our full year Capex plan continues to be approximately $250 million as we continue to make capacity investments and we expect to return to historical levels of 2%.
Sales.
By 2025.
<unk> performance in the first half of the year drove 12% EPS growth as a result of accelerating investments, we expect second half EPS growth to be flat for.
For Q3, specifically, we have a strong outlook and expect reported sales growth of 8%.
Approximately 4% for organic and gross margin expansion. We also expect a significant a significant increase year over year and marketing spend as well as SG&A. Adjusted EPS is expected to be 66 per share a 13% decrease from last year's adjusted Q3 as.
As investment spending is weighted more towards Q3, so to summarize our strong six months of the year are behind US a return to volume growth in the back part of the year a lot of momentum as we move into 2024 and with that Matt and I will be happy to take questions.
Thank you ladies and gentlemen should you have a question. Please press the star followed by the one on your Touchtone phone if you'd like to withdraw your question. Please press the star followed by the Q, if you're using a speaker phone. Please lift the handset before pressing any keys one moment. Please for your first question.
Your first question comes from Chris Carey from Wells Fargo Securities. Please go ahead.
Hey, good morning, Chris.
Chris.
So.
On my math.
This is the.
First a return to organic sales growth.
In personal care.
At the beginning of 2021 unless side.
Later that wrong.
And you know.
Clearly there was some commentary around.
Water picks at vitamins being on plan. Nevertheless.
Does it feel like a bit of a step change John there's kind of an important area of the P&L I Wonder if you could just frame.
What's going on.
On an underlying basis in that business to drive Reaccelerate.
The Reacceleration I know comps are getting easier, but we hear so much about.
Water picking flawless and sometimes not the rest of the underlying drivers of organic sales here.
It really I'm, just trying to get a sense of the full delivery of this personal care portfolio into the back half of the year specifically.
This new base.
Okay I'll start this is Matt.
Chris and then Rick can pile on.
So I mentioned Waterpick end and vitamins so.
That we've said on a full year basis that they would be flattish and that sales. So first half they're both down.
Year over year and your expectation is up in the second half so you're right about that they're going to start contributing to the inflection of.
Personal care starting to grow.
In international.
And we have batiste and Sarah Moore, where we've been sort of what capacity constrained and that's that's abating right now too. So that's going to help us on the international side and Batiste continues to grow in the U S continued to be able to expand as I mentioned in my remarks awareness and also.
So penetration.
Our breath as a juggernaut.
And we bought that business, probably had around $100 million in sales.
Our ambition our long term is for that to be a half a billion dollar business globally.
So it's.
That's going to continue to grow we've got lots of distribution gains already this year and more ahead of us and the same is true for hero here. We just bought last October we've got a fantastic team.
Driving that business.
By and large are all stuck or round with us and we want them to stay for a long time, because we have so much success in so much runway ahead of us. So I'll give you a little sense for half a dozen brands here that are contributing to the growth and I would probably just add Chris its Rick that matts exactly right, but to use their breath all those things are happening.
You're right. Your math is correct Q1 organically for personal care was negative Q2 is positive. We expect Q3 Q4 to be positive. So we do see the inflection point as well and the good news here. That's a that's a high margin part of the business is.
Personal care.
Okay. Yeah. That's just one thing I wanted to confirm that.
It should become a bit more of a catalytic for gross margins in the back half as well.
You just you took care of that 1111, other then I'll get back yet.
We saw some incremental pricing.
In the Nielsen data around laundry.
Just wanted to thank for Matt.
If that's true or not.
Said another way if there was pricing taken in the business and then maybe just.
Contextualized. It I think that was the case why it happened and how youre thinking about.
You're kind of maintaining value and volume share in the laundry business in the U S. Billboard Thanks, so much.
Yeah, we haven't taken any incremental pricing on laundry I mean, theres still the impact of concentration as an example, but that's not really pricing. So we have not taken any incremental pricing yes.
The only area, where we have announced an increase in price to retailers and baking soda for the obvious reasons with a 50% increase in soda ash.
Rick made reference to.
Okay. Thanks, so much.
Your next question comes summary of <unk> Parikh from Oppenheimer. Please go ahead.
Good morning, Thanks for taking my question also congrats on a really nice quarter yeah.
Thanks, So just going to just going back to your commentary on the U S consumer business, where I think you gained share in six gained or maintained share in six out of your 14 power brands category.
How are you thinking about this for the balance of your or do you expect that metric to improve as we get to Q3 and Q4, especially as maybe some of your advertising picks up.
Okay.
We do think we're going to improve that as we go through the year as our marketing investments behind it.
As our fill level levels comp year over year are comparable.
Comparable but I think I, even a better metric is instead of six months 2014, we've been talking about 65% of our net sales have gained share. So that's.
Our large brands are winning.
Yeah, we're past some of the categories in personal care that are down or like battery.
Pregnancy test kits cold shortening.
Small category, so, but they count as one of the 14. So we're trying to we're trying to get the focus more on the big brands and how they're performing.
Okay, Great and then given we've seen margins improve not only for you guys. But also other players out there just curious what are you seeing the competitive promotional backdrop right now and then just how you think about the promotional environment for the balance of the year.
Yeah, well look as far as promotions go generally the conversation goes around.
So if you look at.
The laundry category in total.
Sequentially, it's up about 80 to 90 bps from Q1 to Q2 and.
If you look at liquid laundry detergent that.
A couple of hundred basis points.
Sold on deal from Q1 to Q2 on the other hand, if you look at unit dose sequentially, it's down 340 basis points from Q1 to Q2. So all in I'd say, if you look at the laundry category in total it's not that significantly more promotional in Q2 than Q1, and then if you look at laundry pardon me.
Litter sold on deal just the last few quarters.
It's been pretty steady.
It's been around 15% sold on deal. So I would say no and then the last one would be our vitamin business and Vms that actually is it's less promotional in Q2 than Q1, So I would say that.
From where we sit and we look at our most promotional categories. We think things are pretty steady.
Okay, great. Thank you I'll pass it along.
Yeah.
Your next question comes from Peter Grom from UBS. Please go ahead.
Good morning, guys. This is Brian Adam on for Peter Thanks for taking my question. So just looking at the implied I think you said.
The back half it implies around 2.2 or a little over 2% growth in volumes in the second half should we be thinking about that as a sequential build or is it more just looking at the year ago comparisons without challenge in <unk> is it.
It reasonable to expect that.
<unk> volumes might be on par or even above that.
Yeah, Hey, Brian .
We've kind of said.
Up to 50% in the second half is going to be volume driven and we think that is impactful and flex positively I think because of the comp you know, maybe Q3, a little bit better than Q4.
Okay, Great and then just one more quick one on specialty products.
During the quarter the expectation was for that business to be slightly negative this year and you've had another choppy quarter here I know you called out the reasons why the lower priced imports.
For one I'm far from an expert on the puts and takes of the.
Our business here, but just looking ahead should we expect kind of.
Similarly challenged backdrop as we head into the second half are you expecting any improvement here.
Yeah, I'll give me the division kind of organic outlook here in July so approximately 5%.
For domestic 6% to 7% for international and negative for SPD and that gets us to approximately 5%. So we continue to think we will.
We will have the same issue that we experienced in Q2 for the balance of the year.
Awesome. Thanks, Alright, thanks, guys.
Your next question comes from Lauren Lieberman from Barclays. Please go ahead.
Great. Thanks, good morning.
It's only maybe try to ask a bit of a longer term question.
Is that now that <unk> got really good visibility into gross margin recovery to pre COVID-19 levels.
Through the worst in terms of the discretionary driven volatility on top line.
And with all of that reinvest in setup to get back to.
Not quite 12%, but a huge step change this year.
Now the things are kind of more settled if you will you also talked about some incremental investments in inefficiency.
Inefficiency and so I was wondering if we can.
Could just hear a little bit about kind of longer range planning as you think about investments in capabilities in supply chain, which I know we've talked about in pieces, but are you kind of think over a multi year view, perhaps how you think about investments that you may want to be making.
More on kind of infrastructure to support the business.
The hindsight being 2020 of some of the operational headwinds that you ultimately phase during the global pandemic that nobody could have planned for.
Yes.
Good question.
I know you've heard us say in the past that we think that.
Sales per employee is an underappreciated.
Measurement of the company's performance.
But we focus on that quite a bit.
And Rick can chime in with some some details but.
When we look at how do we make our.
Our people in the plants more efficient through automation and how do we do the same with respect to the <unk>.
White collar office workers.
We're going to be close to 6 billion in sales next year, we are around 50 50.
<unk> 52 5300.
<unk> employees and the goal here is can you continue to grow your top line without necessarily growing the number of plants that you have or the number of employees that you have to make make the team far more efficient, but Rick can give you a couple of examples of RPI.
And the number of projects we've done in the past how many we plan to do this year and in the future as an example of how you try to make your certainly your office workers more productive and of course, we like so many other companies out there are now looking to.
And Chad and say well, how can we leverage that to make everybody more productive, but Rick you can throw a few examples on the table yeah. So its all in the backdrop of making sure that our evergreen model of 25 basis points of SG&A leverage each and every year as you know.
Is solid for the next 510 years.
So two examples like one Matt mentioned is like RPI, So I know.
One of the investments, we're making right now with automation and technology as you know we have.
20, or 30 projects that represents represents thousands and thousands of hours that were automating and that way that our people have more capacity.
To do other work.
Which is really impactful as we build the company and then we have more and more brands every day. The second one we're doing is we're making significant technology investments I think you've heard us talk about before but we put in an ERP system in to China. As an example, we're investing in to an ERP system for our Gmg business, which is our fastest grower.
The international business. So, we're putting technology, we're putting enabling technology to it so that we can scale and grow we have SG&A investments for people in regulatory and R&D. So that that business can continue to grow at the rate it's been growing at.
Okay, great. Thanks, so much.
Thanks Laurent.
Your next question comes from Dara <unk> from Morgan Stanley . Please go ahead.
Hey, good morning, guys.
Hey, there.
So.
Just along the vein and the last question clearly a lot of reinvestment in the back half of the year relative to our original plan.
Can you just talk about the level of payback you expect from those investment areas as well as the timing of payback, obviously marketing as a line item that's highly visible to us, but it seems like there are a bunch of other areas in terms of higher R&D Greater registration technology, you just mentioned the European China, Rick So those are more.
Listen harder to judge so just how do you think about the payback and are you basically pulling forward some incremental investment that would have occurred in 24 as we think about this reinvestment in the back half of the year. Thanks.
Yes, so in terms of payback, we'll start with marketing the marketing, we're spending $30 million more where are we spending.
That incremental marketing, while it's around brands.
Thorough breath like hero the arm <unk> Hammer campaign, given the hammer, which has been great and the recessionary time. So all those things are driving the top line, we're seeing an immediate payback right. We talked about distribution gains for third breath and hero. Sometimes these are the first national campaigns they've ever experienced in and consumption is is on fire.
And that's as a result of marketing and distribution gains so that payback. There's rapid on the SG&A you know two thirds of that SG&A number is incentive comp year over year as our results are outperforming and then maybe a one third is the investments and those investments are more onetime in nature and.
Yeah like for registration.
We pulled forward a couple of years and registrations, we may do that.
That again in terms of.
It gets us a ready ready to grow even faster and it gives you more optionality.
To expand in different countries around the world.
Matt you would add yeah, I'd, just say that we are.
We're very consistent we got a long standing practice that when the business is performing well.
We look at that as an opportunity to reinvest so things initiatives you might have had.
Next year the year after me and say Hey, we could fund it now, let's do it and and as with respect to marketing, it's really a no brainer.
There's more marketing correlates with this with the health of our brands and the strength of your brand equity and you can't live with 10% of sales.
There is another example of something we were going to ramp up in 'twenty four.
We got ahead of it now so that is not going to be a drag year over year and 24 versus 23 that ramp up to 11%. So these are all it's all good things.
That's helpful. Thanks, guys.
Your next question comes from Andrea Teixeira from Jpmorgan. Please go ahead.
Thank you good morning.
I wanted to ask more about your point on volumes for the more discretionary categories not not to take away from obviously the NIM.
The improvement in any other areas in the downstream that you benefit but some of these categories that are of course, the 20% I believe is still around what David presented in your in your revenues.
I understand that you are comping very easy comparisons, but no consumption wise I wonder why consumers will go back to flawless and water given the headwinds in the category.
And in General I think we've heard all companies talk about like well, we will see volumes rebounding.
Your volumes were relatively outperforming so I Wonder X X those two those three categories, including Dms. So what makes you comfortable with.
The rebound in volume does that is predicated in your guidance. Thank you.
Yeah, well I'll start with flawless, we haven't said a word about flawless nor will we.
It's a small brand.
For us now as far as water pay just remember when we entered the year. If you go back six months, we said hey, the first six months, we're going to be choppy here, we had inventory in the channel that we had to work through we had an imbalance out there that's behind us now.
So that obviously has a direct impact on ourselves in the second half and the same with vitamins.
That was our biggest problem child when it came to supply in 2022, we get we get punished for that by suppliers, where we lost displays some cases lost is this.
Distribution.
So consequently.
Took that on the chin in the first half, but that's starting to improve in the second half as far as the number of displays we're able to get in and some of the the various so we weren't able to make them.
Last year that we're going to start introducing back in example.
Magnesium.
For example.
So for those two businesses, we would say hey, there's reasons to believe that theres going to sort of inflicting.
In the second half yeah, and so I'll just give you a couple of comments to Andrea and the back half of 2020.
Two of those businesses were down so we expect those businesses to be really.
Like Matt said earlier.
A couple of them a little positive in the back half and really flat for the year, but when you add all those three businesses and the impact it had on the company had quoted a couple of times, but in Q4. It was a 4% drag in Q1, they were a 3% drag in Q2, there were only a 1% drag and we expect them to be flat in the second half so it's already improved.
I guess, what we're saying.
Mhm, Okay. Thank you.
Thank you. Our next question comes from Steve Powers from Deutsche Bank. Please go ahead.
Hey, thanks.
On why the fusion, just maybe a little bit more detail on.
Your visibility into stabilization and kind of winning back those those retailers.
Consumer just kind of where you are in the process and how long do you think it will take.
That was a lot of work's been Ben.
<unk> gone into the into this business.
And are we looking at our packaging our graphics our messaging.
Okay.
Blackout, we got last year, it gave us a chance to stand down and take a hard look at the brand. The look ahead I think over the next 12 months youre going to start seeing some changes.
On shelf and how we go to market I wouldn't disclose.
Any more than that right now.
Anything to add.
Yeah, I mean for for vitamins I think its.
No when we have our TDP is get impacted a little bit because we are in the penalty box for supply and now we got to do what Matt alluded to we're gonna get we've gotten more displays we've we're adding advertising we're looking at our messaging and then it takes you know nine months or so to make that case for the retailers. So you can.
The distribution.
And our leading position.
Okay.
Okay. Thanks, Thanks for that I guess, just going back to.
Maybe kind of the question there is that Lauren brought up on the reinvestment rates I think the Reinvestments are doing now.
Very well telegraphed as you've articulated.
Necessary for.
For lots of reasons, but I guess.
The idea of matters.
You outlined.
The history of the business has been when things are good you reinvest kind of go ahead go ahead I guess can you just talk a little there's a little bit of attention between.
That dynamic.
And then the other the other side of it trying to catch up from sort of a lost year in 'twenty two so as you go forward.
Do you is the philosophy to run the business as you have from here forward, which effectively means we're kind of getting back to more of an evergreen mentality off of this newly established base or is there more of a desire at some point.
It's a recoup of the recruits.
Recoup some of these upfront investments and kind of.
Returned to trend off of maybe 21 basis like how do you. How do you think about think about that.
From just how youre managing the business from here.
Yeah, well look we have.
Been here for a long time since 2006, and we've had we've live with our evergreen model for many many years and it served us well and last year was an anomaly for us and we said, okay. We got to get back to our algorithm.
<unk>.
We said, we had a big step up in 2023 and by virtue of what we've shown in the first half we're going to get to 6% EPS growth in 2023, we're going to get marketing back up to 11% of sales, which is how we want to run the railroad and we sold 200 basis points light.
Versus what our gross margins were.
Pre COVID-19 so when we get to the end of 'twenty. Three that's ahead of US. So it's good I guess, a few years to get back there, but as we improve our gross margin in 'twenty four 'twenty five that's obviously going to throw off.
A fair amount of profit. So if you look at the just the first half of this year, we had double digit gross profit growth.
A great trend so.
I'd say the short story is the success we've had in the first six months.
The strength, we see in the second half certain land sales and gross profit growth.
It gives us greater confidence so we can return to our normal evergreen model algorithm in 2024.
But we're not you know it's too early to be.
Calling numbers at this point, but I think the go into 11% of marketing as a percentage of sales. This year is a big deal it won't be a headwind next year 24 versus 23.
Still have the ambition to grow gross margin significantly in next couple of years. So.
It's a short story about how we think about the P&L Steve.
Okay. Thank you very much right.
Your next question comes from.
Bank of America. Please go ahead.
Hi, Good morning, Thank you for the question.
I was wondering on the distribution gains with euro and thorough Brad could you comment on where you are seeing the largest gains in distribution with your various retail partners and are there any challenges to gaining distribution.
Also to what extent do you think you have more runway on distribution and do you have any concern from some of the larger brands that have been innovating in this space with similar offerings that might have distribution already well established.
Yeah, I'm going to as I go through you're going to have to remind me about that.
Question, three and four.
As far as where the distributions coming from of you take a hero. So hero was built through Amazon target and.
And Alta and those were the mainstay.
Retailers that the hero team chose to grow their brand.
So consequently every other retailer and class of trade is an opportunity for us.
So we've that's what we've been pursuing.
Going after a mass which would be.
So retailers like Walmart.
The big drug chains et cetera, and then and then food so the opportunity is a.
It would be distribution and b would be facings.
Now if you go to Sarah Brass service was was more developed as far as.
Throughout many classes of trade, but not with respect to facings.
And how many variance are shown.
So there's two things happening with direct one is yes, we're getting more retailers, but we're spreading out more on shelf and and has because this is the actually the highest priced mouthwash, it's accounting for 50% of the category growth and mouthwash in Q2 now the retailers see that their penny profit is high.
On a on a third both mouthwash. So consequently, there they're interested in helping us grow so we can anticipate more facings in the future.
Particularly in 2024.
So I think I think both of those brands.
Have a big tailwind.
And I would just add I ended up both of those brands have a lot of runway left on TD piece, you know even if you look at their breath. For example, it's maybe third or fourth and in the in the <unk>.
Segment on T D piece and the next step change maybe as another competitor that has 1100, so there's still room to run.
Yeah, I mean, the amount of the velocity in our sales. So we have wood would suggest that we should have far more shelf space than we have today.
Thank you and just any concern I guess from some of the larger brands that have been innovating in this space with some similar offering that already have some distribution well established any concern from that.
Are you referring to the acne category.
Yeah, both in the acne category and in the Mouthwash category.
Yeah, well look.
We welcome competition.
Far as patches go the advantage Mighty patch has is number one it was first and number two its branches more efficacious than other patches.
So I think that is what's going to make the difference going forward.
Yeah, and as far as their breath grows you know <unk> got a different formula than than other mouthwash is even in the mouth washes and non alcohol. So no I would say.
We feel advantaged with respect to our offering not just our formulas, but also our packaging and our go to market strategy and our use of social media.
Great. Thanks very much.
Your next question comes from Bill Chappell with Suntrust Securities. Please go ahead.
Thanks, Good morning Bill.
Bill.
Just a little bit more on sodium bicarbonate, just I don't remember, maybe you've said it what percentage that is in terms of of of cost goods sold but also in because I always enjoyed the discussion on animal husbandry I thought the key part of the specialty ingredients business was beating.
Sodium bicarbonate to cows to produce more milk, so why would that business not be passing up pretty meaningful price increases as well and driving sales.
Yeah.
Yes, sodium bicarbonate.
It's not a big part of the animal business within SPD.
As far as we got into the animal business about.
About 50 years ago, when we learned that that we.
We were selling.
Super sacks of baking soda to big Bakers and they were selling out the back door to some dairies and there were sort of us putting in the three to sort of like Alka seltzer for cows.
That then got us into other nutritional products prebiotic probiotics overtime. So the story with respect to soda ash and sodium bicarbonate is largely on the consumer side of the business now as specialty products business.
Two thirds is animal one third is bulk sodium bicarbonate and there you would see that we have been raising price, but you know.
This is just a it's a $100 million business. So it's not a real needle mover for us Bill when we raise price.
And bulk sodium bicarbonate.
Got it so it's not enough to drive sales.
Yeah on the consumer side.
It's a much bigger deal we don't typically quote what percentage of our Cogs is.
Sodium bicarbonate are baking soda, but.
Remember, we use baking soda and a lot of different products and toothpaste.
The ROM deodorant.
Litter.
Laundry detergent.
We use it quite a bit so it does matter.
Okay, and then secondly, and I might Miss it would've been in terms of.
The strength of the results in the past couple of quarters. You know you would leaned on we're not lean on indicated that consumer trade down was what's driving it I mean is that still a big driver I mean, it seems like it's more just the strength of the brands and the categories in or is it really your you're continuing to see our nerves.
Consumer.
Yeah, well look the we've.
We've had four quarters now four or five quarters now of trade down.
So that's happening mid 'twenty, two and it's kind of.
It continued through mid 'twenty three so you would say now that you're sort of starting to lap the trade down, but but the the arm <unk> Hammer brand is continues to grow and you know like I said July is equally as strong as year over year as.
Q1, and Q2 in fact.
As Rick has pointed out and we pointed out in the release.
A lot of the year over year comparisons ventures for church, <unk> Dwight, but most CPG has been colored by price.
And the expectation now because we're going to go positive in volume and.
In Q3 and Q4, so we expect that the launch is going to be one of those participants for positive volume in Q3.
Got it thanks, so much okay.
Your next question comes from all of your thoughts gentlemen, Please go ahead.
Great. Thanks, good morning.
First question is around marketing if you could just elaborate in terms of how much of the marketing spend is going towards maybe some more value to your product where you are seeing some of that trade down benefit.
Some of the higher and thorough Brett hero.
Personal care type products.
Well you heard Rick Rick mentioned that.
Hero and Sarabeth by virtue of being part of Church <unk> Dwight.
Certainly have the wherewithal to <unk>.
Invest quite a bit on two brands that are growing significantly and have a lot of runway.
Runway ahead of them the other place destination would be which I mentioned briefly in my opening remarks, and that's our master brand campaign, which is going to give it the hammer and to give it the hammer campaign is really resonating with consumers.
I am just talking about your average consumer out there and it's really resonating with them because it really halo so all of our different categories.
It's.
It's consistent and we came up with this as we entered the year. We said Hey, we've got all this trade down going on arm <unk> Hammer is the working man's Brent.
Let's get behind then let's come up with a campaign that's going to go to support that thesis and it's working that brand is really scoring super high and we're continuing to get behind it we're going to get behind it in the second half continually.
Great and then.
Just following up in terms of your expectations for volumes to turn positive in the second half and being up for the fiscal year. As you mentioned in your prepared remarks, you talked about your view on on price mix in second half.
And then.
Maybe on price.
What's already in place that haven't lapped yet.
And whether you have incremental plans in the second half of the year.
Yeah.
Hey, Olivia so there's there's most of our pricing has lapped you know a lot of our laundry litter oxiclean pricing happened in July a year ago. So most of the pricing has been lapped theres a little bit.
Still to come that's why we're saying maybe 50 50 in the back half of the year and then the only only pricing action that we've talked about is is baked in so that's the only one left for me.
A list price perspective, we always want to optimize trade and in revenue growth management, but.
With a 50% increase in and.
Yes.
<unk> would be the other one that we haven't completely lapped right. All the price increases. So that is that's going to be part of the story for price in the second half as attrition pool.
Great. Thank you.
Okay.
Your next question comes from Filippo <unk>.
From Citi. Please go ahead.
Hey, good morning, guys.
I wanted to ask a question on private label I know some of your largest category. We don't have a lot of exposure, but maybe you can comment on private label performance in some of the categories that do have that exposure and then Matt to your point on consumer trade down kind of starting to cycle that what are you assuming in your.
Our second half guidance are you, assuming a continuation of the trend of acceleration of the trend towards trade down.
Any color would be helpful. Thank you.
Yeah, well look this is a half a dozen.
Categories, where we have private label competition and I.
I would say litter is usually the one we've talked most about them, but that's been stable for the last three quarters, it's around 13% Q4, Q Q1 and Q2.
As far as trade down goes.
Household it's a consumer is more likely to trade down.
Talked about trade down.
Within laundry to arm <unk> Hammer, we've had four quarters of that as I just mentioned the previous question.
We do it based on how July is setting up it looks like that's continuing to happen and what do I do expect it is going to abate a little bit one thing. That's notable about trade down is which I said in my opening remarks is that extra which is a extreme value detergent.
You know it grew seven 5% consumption in Q2, and it actually gained share and that was the first time and I was like 14 quarters that extra gain share so that would suggest that there's a.
Trade down in Q2 remember.
Recent quarter first time, that's happened in 14 quarters. So you would say yes. It is still has a tendency to trade down, particularly on the household side. When it comes to personal care, particularly health related categories are far less likely to see trade them. So I think it's more of a household story.
Got it that's helpful. Thank you guys okay.
Our last question for today comes from.
Colin.
Evercore ISI. Please go ahead.
Hi, Good morning, everybody one another permutation on the spending then for investment and what prospect from it.
In the second half.
It feels as if do you guys have built.
Financial benefit from that expanding the higher advertising spending.
In the second half or not.
Just basically you are assuming in that.
Yes, rebuilding a baseline of investment.
Well look some of it is it's hard to parse out how much is restoring.
Your.
Typical spend to maintain brand health.
And how much is actually going to going to juice. Your topline as Rick said I think it's more likely that it's going to help thorough breath.
Hero.
In the second half the brands that are already doing extremely well just pour some gasoline on those yeah and Javier I would say it also positions us well as we enter 2024.
So that should be taken into account as well.
Yeah.
<unk> continue these well say right that essentially gross margin ahead topline ahead that upside do rather say close the year with.
12% advertising spending or you would rather balanced that out.
So some of the upside.
So the bottom line. Thank you.
Yeah, well I mean, our outlook is what our outlook is that's our best forecast of results. So right now, we're saying I'm extremely happy that we got to 6% EPS growth, while bringing marketing back up to 11%, which we thought was going to take two years, we're doing it all in one year and also making some investments for the future.
Not really ready to talk about what we're gonna do if we have upside to that but they all look just to pile on gross margin expansion in gross profit growing.
These are all.
Great things some volume inflicting to positive in the second half.
There's a lot of our borrowers right now for the company.
Absolutely. Thank you very much.
I will now turn the call back over to Matt Farrell for closing remarks.
Yeah, Hey, thanks, everybody for joining us today and look forward to talking to you again at the end of the third quarter.
Good one.
Ladies and gentlemen, this concludes your conference call for today, we thank you for joining and you may now disconnect your lines.
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